Give me a crash course in . . . bank stress tests

 

Why are the Central Bank’s stress tests so stressful?A medical stress test involves hooking cardiac patients up to ECGs and asking them to run on a treadmill, with the slope and speed steadily increased to see how their hearts respond. The main difference with banking stress tests is that human patients are usually still alive when they step on the machine, while the Central Bank’s critics argue that some or all of Ireland’s banks are, to use the technical term, zombies.

What stresses are being tested for, exactly?The maximum slope on the treadmill is represented by a series of “adverse economic scenarios”, or cold-sweat moments. For example, the Central Bank’s “base” scenario allows for a 13.6 per cent peak in unemployment, while its “stress”, or worst-case, scenario envisages how a 15.8 per cent peak might affect bank losses.

What’s the unemployment rate now?It’s 14.7 per cent, according to the Central Statistics Office.

Ah. Why do the banks “need” another €24 billion?The Central Bank predicts that loan losses at AIB, Bank of Ireland, Irish Life & Permanent and EBS will be €27.7 billion in the next three years. It has added to this a further €13.2 billion in estimated write-offs and subtracted the total from the existing capital and projected operating profits (yes, there are some). Then it has worked out the difference between this sum and the amount of money the banks would require to satisfy the Central Bank’s minimum capital targets. It has also thrown in an additional capital buffer should things go really wrong. The magic number at the end of all this crazy-stake maths is €24 billion – the equivalent of all the income tax and Vat that the Government expects to collect this year.

Where is this money going to come from?Remember the National Pensions Reserve Fund? RIP.

Is this fair?Fairness doesn’t come into it, admits Central Bank governor Patrick Honohan (left). Its recommendations are based on “expediency” and delivering the best possible “net gain” for Ireland, he claims.

Why have we got an overwhelming sense of deja vu?It might be because this is the fifth bailout of the banks since 2008 and the third round of stress tests. The last two barely raised the banks’ blood pressure; this time the Central Bank has forced them to properly perspire. It hired consultants BlackRock to feed about 700,000 mortgages through its models, calculating how many of the loans would be repaid, how many would go bad and how many were locked into unprofitable interest rates.

Unprofitable interest rates?Yes. Too many people found out what tracker mortgages were. These loans, sold at a time of intense, irresponsible customer-grabbing, have “built-in unprofitability”, according to Prof Honohan.

Are all these blank cheques to the banks a good idea?Not according to European Central Bank governing council member Axel Weber. It’s a mistake to make taxpayers liable for all bank risks rather than obliging private investors to shoulder some losses, he says.

What does this latest capital injection mean for Ireland’s solvency?The idea is that the amorphous mass of institutions that form “the market” will be so delighted by Ireland’s overstuffed banking sector they will rush to invest in this capitalists’ paradise. Unless they’re too busy bullying Portugal, of course.